Inflation moves up despite a fall in IIP: CRISIL

India Infoline News Service | Mumbai |

A continued weakness in domestic demand pressures should however, limit the upside pressure on retail inflation going forward

Retail inflation rose to 8.3% in March from 8% in the previous month as food inflation rose due to faster increase in prices of vegetables, fruits and milk & milk products. Average CPI inflation for fiscal 2014 stands at 9.5% compared to 10.2% last year.
We expect inflation to hover between 8%-8.5% in the coming months, and hence, RBI to keep rates on hold - till temporary shocks and disturbances clear out and the underlying inflation momentum becomes evident.
A continued weakness in domestic demand pressures should however, limit the upside pressure on retail inflation going forward, The Index of Industrial Production (IIP) fell 1.9% in February after staying almost flat in January. Any hopes of a sustained recovery in industrial production due to high core infrastructure sector output growth in February, were dismayed by persistent weakness in consumption demand.
CPI Inflation edges up with rising food inflation CPI inflation rose to 8.3% in March from 8.0% in the previous month, breaking its four month consecutive fall.
This was driven by a rise in food inflation to 9.1% y-o-y from 8.6% in the previous month on the back of rising vegetables, fruits, and milk & milk product prices. WPI inflation too jumped up to 5.7% in March from 4.7% in the previous month, on the back of higher food price inflation.
CPI Core inflation (excluding food and fuel & light) inched up to 7.8% y-o-y in March from 7.7% in February (revised down from the provisional estimate). The overall trend in core inflation, however, masks the underlying movements in the index. Housing and transportation & communication prices have been moving down in recent months (accounting for 40% of the overall weight in core) in line with the fall in crude oil prices and lower import costs due to stabilisation in the rupee. However, prices of the other items in the core inflation category such as clothing, bedding & footwear, medical care, education, recreation, personal care and household requisites (60% weight in core) remain sticky or continue to rise.
In the months to come, high inflation in food articles such as fruits, milk & milk products will keep retail inflation sticky around the current level. Preliminary reports suggest that unseasonal rains along with hailstorms and frost have adversely impacted the Rabi crop during early March and thus may have an impact on prices. In addition, an enhanced possibility of an El Niño in 2014 could push up CPI inflation with the weight of agriculture-related articles accounting for 50% of the CPI. However, on the upside, inflation is likely to be capped at 8.5% as the lagged impact of previous rate hikes seeps through. Also falling inflation expectations, a negative output gap and continued weakness in domestic demand will keep inflation at bay.
 

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